With a shakeout of the private equity industry looming and many in the sector on the hunt for fresh capital, managers are turning to external advisers to give them the edge in an increasingly competitive environment for raising funds.

Some of Europe’s largest buyout firms – including Apax Partners, Cinven, Nordic Capital and Permira –
are all currently on the fundraising trail, with rivals CVC Capital, Doughty Hanson and 3i Group all expected to follow suit next year.

But the firms are returning to a fundraising market that has far less capacity and is more discerning of performance than when they last raised capital. The more hostile environment has led to increased demand among fund managers for external advisers or “placement agents” skilled in sourcing investors for commitments to new funds.

Placement services are offered by a range of boutiques alongside a number of banks, including UBS and Credit Suisse. Mounir Guen, founder of placement agent MVision Private Equity Advisers, feels the increased volume of work for agents is creating some long-term challenges for the industry, not least in terms of client selection, given that this process is becoming more data driven.

Guen said: “The challenge is the quality of product we will be able to work with – the selection of clients that agents choose to work with is going to be key in the next 12 to 18 months.”

He added: “The process is becoming ever more administrative. I can tell you that every time we launch a new fund the paper trail can easily hit 5,000 pages. As an exercise, we once printed off all the materials related to a single fundraising mandate and it stood taller than my 6’ 5” colleague.”

Antoine Dréan, chief executive of placement agent and secondaries adviser Triago, said that the perception of placement agents was changing, with general partners who had traditionally avoided using them now viewing their services as “indispensable” in developing relevant investor target lists, coordinating road shows and helping clients with “strategic positioning and branding” even before formal fundraising begins.

Dréan said: “General partners now realise the need to diversify their investor bases by geography and type to mitigate correlated investor risk. Limited partners have become doubting Thomases and are putting general partners through gruelling processes to verify that good performance depends on real expertise and not leverage.”

Data provider Preqin estimates that 1,728 funds are seeking capital, more than has been seen at any point in the past couple of years.

A Preqin spokesman said that their number was set to grow and that, in the current environment, it would remain “extremely difficult” for managers to stand out in what is developing into a very crowded fund-hunting beauty parade.

The need to diversify the investor base has been largely led by continued regulatory change. Banks, a traditional source of capital, have provided fund commitments to cement relationships with managers in order to provide debt financing for buyout deals.

Now, however, they are unwilling, or in some cases unable, to recommit due to new regulatory reforms, such as Basel III, which will require banks to hold a greater degree of capital against their assets.
Similarly, the European insurance industry, another traditional investor in the asset class, is likely to decrease its long-term commitment as a result of Solvency II regulations currently being introduced by the European Commission.

Under Solvency II, unlisted private equity will sit under the “other equities” umbrella group, which is currently allocated a “shock buffer” of 49%, meaning that for every €100 invested the insurer would be required to hold up to €49 of capital against that investment, one of the highest buffers in the legislation.
Guen believes that, given the new environment, fund managers need to be “cognisant” of the different messages coming through from the remaining traditional sources of capital, pension funds and endowments.

He said: “Many US investors have concerns about Europe, so instead of committing $1bn they may choose to put to work $700m. That has created more capacity locally and mid-size US managers are reaping the benefit of that.

“Furthermore, alternatives investors are moving their allocation mix from 2% to 5% in emerging markets focused managers to 20% to 25% and I can easily foresee a situation in the next decade whereby investors will split their allocation equally between US, Europe and emerging markets.”

According to one European fund of funds manager, the shift in investor appetite away from Europe towards Asia means “some managers will struggle and, by extension, some placement agents. They, like managers, cannot afford to have too many failures.”

It all amounts to a massive challenge for fund managers just as they look to replenish their investment pots.

During the peak of the financial crisis in 2008-2009 many private equity firms delayed going back to investors to raise capital due to “a combination of issues with their portfolio and the lack of pipeline opportunities”, according to one private equity fund manager.

The decision to delay coming back to market was not an immediate issue for most managers, with the vast majority having raised substantial sums in 2006-2007.

Additionally, under the terms of their fund agreements, they had five years in which to deploy their capital.

However, the investment periods on those fund vintages are now beginning to expire and managers face the choice of either trying to garner extensions or return to market. By and large, managers are opting for the latter.